Was Carlos Ghosn sting compliance or coup d'etat?

Carlos Ghosn, accused of improperly reporting his compensation, is being held in the Tokyo Detention House.

TOKYO — As Carlos Ghosn sits in a cramped Japanese jail with the fate of his global auto empire in limbo, two conflicting scenarios are emerging to explain the stunning upheaval.

The first — the official story laid out publicly by Nissan CEO Hiroto Saikawa — is that Ghosn simply got caught breaking the law. Saikawa, the brush-cut executive who for nearly two decades was Ghosn's loyal understudy, executed his fiduciary responsibility by reporting the matter to the prosecutors and having Ghosn removed as Nissan's chairman.

The second scenario isn't so cut and dried.

It's a conspiracy theory gaining currency among former Nissan personnel and observers. And it paints a different picture of Saikawa, Ghosn and the Renault-Nissan- Mitsubishi Alliance, which Ghosn seeded some two decades ago and cultivated into the world's largest auto group.

In that alternative scenario, Ghosn, 64, may or may not have violated Japanese law. Indeed, at press time, he had yet to be officially charged, and the specifics of his alleged crime have not been made public. But Saikawa, 65 and facing his own retirement horizon, seized on Ghosn's Nov. 19 arrest to jettison the iron-fisted boss and potentially wrest control of the Japanese automaker from its top shareholder, France's Renault, according to speculation.

As Ghosn enters his third week jailed in Japan, the truth of the matter is still unfolding.

Ghosn is now deposed as chairman of Nissan and Mitsubishi, two of the three carmakers he is hailed for hammering together into the Renault-Nissan-Mitsubishi alliance. The future of the group grows increasingly cloudy, despite fresh efforts to present a united facade last week at an Alliance meeting in Amsterdam.

Ghosn is accused of attempting to hide about $80 million in compensation. Unclear last week was whether his alleged actions were technically improper.

Reaction to his sudden demise brought slack-jawed dismay.

"I was shocked. I just couldn't believe it," Mitsubishi CEO Osamu Masuko said last week, shortly after his board followed Nissan's in removing Ghosn as chairman.

"I still don't understand why," Masuko said.

But half a world away in France, the narrative takes a different tenor. Among that country's screaming headlines, one asked: "Is the Ghosn affair a coup d'etat fomented by Nissan?" Asked another: "Carlos Ghosn in prison: scandal or conspiracy?" And a third: "Carlos Ghosn: Is the theory of a conspiracy credible?"

Even in the U.S., The Wall Street Journal's editorial board decried Ghosn's plight as an "inquisition."

Saikawa denies the actions were part of a boardroom coup.

When asked just hours after Ghosn's arrest, Saikawa replied: "That is not how we see it."

Others remain skeptical.

"I don't accept that this was a coincidence," said Christopher Richter, senior auto analyst at CLSA Asia-Pacific Markets. "This was a situation Saikawa and Nissan found very useful. The stars aligned, and the moment was right to strike. And there you have it."

Photo

The Tokyo Detention House

'Ghosn Shock'

Ghosn's arrest in Tokyo occurred against a backdrop of mounting distrust between Nissan and Renault. Renault owns a controlling 43.4 percent of Nissan, but Renault's top shareholder, the French government, has pressured Renault to finalize an "irreversible" partnership between the two companies. Not long after French authorities tasked Ghosn to do so, a Nissan whistleblower reported Ghosn's alleged misconduct and Japanese law enforcement swooped.

The resulting "Ghosn Shock," as it's being referred to in the Japanese media, is wrapped in mystery. And like any good conspiracy theory, one explanation churns up new questions.

One example: If Ghosn indeed has been improperly reporting compensation to the tune of ¥9 billion ($80 million) over eight years starting in 2009, why did the matter surface only this year?

Some are wondering how that large discrepancy could have gone unnoticed, since Nissan Motor Co. is one of the bluest of Japanese blue-chips. It is run by some of the world's biggest business brains and vetted by an army of auditors.

Another question from some observers: Why isn't Nissan being more public with details of Ghosn's alleged crimes? Even Masuko conceded that Mitsubishi's board summarily ousted Ghosn as chairman, even though the board's Nissan-appointed directors presented scant particulars of the case against him.

Background movement

The ballooning scandal comes on the heels of the 2017 changing of the guard when Ghosn handed the CEO reins to Saikawa. According to multiple accounts from current and former Nissan executives and managers, Saikawa capitalized on his new power to set his own course for Nissan and safeguard its independence.

Also a possible factor is the friction between Renault and Nissan, exacerbated by the French government. In 2015, the French government made a power play to increase its control of Renault. By extension, that would have boosted France's influence at the Japanese automaker.

Such a move found immediate resistance at Nissan, which has grown bigger and richer since its financially troubled days of 1999 when Renault acquired control.

"I don't think anyone at Renault fully appreciated the deep-seated resentment on the Japanese side," one Nissan insider said. "Was recasting the alliance the objective of the investigation?"

Another possible explanation for the surprise move against Ghosn: This year, for the first time, Japan adopted a criminal plea bargaining system. That new prosecution tool could have provided the perfect cover for someone to air Nissan's dirty laundry. And Tokyo's notoriously zealous prosecutors were happy to make Ghosn a shining example of the new rules in action.

The details of the case against the globally recognized Ghosn are still not clear. Nissan director Greg Kelly — a Nissan human resources executive, an American lawyer and Ghosn's longtime right-hand man — also was arrested on Nov. 19 and fingered by Saikawa as the scheme's "mastermind."

According to a person familiar with the matter, Ghosn and Kelly are accused of executing a plan to split Ghosn's total annual compensation in two. One portion would be publicly reported as required on financial filings. The other would be deferred for payment to Ghosn in retirement.

The probe alleges that Ghosn began doing this to avoid the unflattering public scrutiny of his outsized salary in Japan, where executives take home comparatively modest pay. Prosecutors say Ghosn and Kelly implemented the deferred payment in 2009, the year that a new Japanese law began requiring companies to disclose pay for any individual executive totaling ¥100 million or more — about $880,000, a person familiar with the matter said.

The probe alleges that Ghosn has been deferring about half of his annual compensation package for future determinations since 2009. By March 2018, that deferred compensation from Nissan totaled approximately $80 million.

Ghosn is alleged to have earned about $22 million in Nissan's last fiscal year, but reported only about $6.5 million. By contrast, the then-new CEO Saikawa was paid ¥499 million, or about $4.39 million, for the year. And that was before Saikawa's self-imposed pay cut, which he took to atone for the company's final-inspection scandal in Japan, an unrelated issue.

Prosecutors and Nissan now say that the problem with Ghosn's methods is that even his deferred compensation amount should have been reported by the company as a future liability.

The emerging defense argument, according to Japanese media reports, is that Ghosn and Kelly didn't deliberately hide compensation while knowing it had to be reported. One counter-argument contends that the remuneration did not need to be reported because the exact amount was still undetermined and because it had yet to be disbursed.

Corporate governance

Nissan's corporate governance policy allows the chairman to determine the compensation of each board director — including his own. To some, that raises as many red flags about Nissan's corporate governance as it does about Ghosn and Kelly. According to a Reuters report citing an unnamed source, Nissan's corporate auditors, Ernst & Young ShinNihon, repeatedly questioned suspicious transactions linked to the case, only to be told by Nissan that nothing was amiss.

"The company has a responsibility for the transparency of the process," said Takaki Nakanishi, CEO of Nakanishi Research Institute in Tokyo. "They need to clarify their governance issues."

Ghosn also stands accused of channeling Nissan money into houses and apartments around the world with Kelly's assistance — in Tokyo, Paris, Amsterdam, Rio de Janeiro and Beirut — for his personal use. Nissan claims Ghosn also had the company pay his sister for a $100,000-a-year advisory job.

With both men still jailed, neither Ghosn nor Kelly has issued a public statement.

Kelly's attorney, Yoichi Kitamura, said his client denies the allegations.

The office of Ghosn's lawyer in Japan, Motonaru Ohtsuru, declined to comment. Japanese media have reported that Ghosn maintains his innocence to prosecutors.

Ghosn has hired an elite defense team. Ohtsuru is a former public prosecutor famed for taking down some of Japan Inc.'s biggest names in corporate corruption. That includes Takafumi Horie, a high-profile Internet entrepreneur who spent more than two years in prison for securities fraud. Ghosn will be banking on Ohtsuru's inside knowledge of Japan's hermetic judicial system. Ghosn has also reportedly tapped U.S.-based law firm Paul, Weiss, Rifkind, Wharton & Garrison.

Tired of 'regime'

Looming in the background has been the simmering drama between Nissan and Renault.

The first turning point came in 2015, when the French government increased its controlling 15 percent stake in Renault to win double voting rights for its two directors on the carmaker's board.

Nonetheless, Ghosn was moving the two companies into a new phase of convergence. Nissan and Renault had long shared purchasing and manufacturing functions. Ghosn's new directive was to find more common ground on their engineering activity, product development and executive leadership.

That has spurred concern on both sides, in France and in Japan, about losing influence or independence. Saikawa reportedly pressed Renault to agree not to meddle in Nissan's corporate affairs.

Last year, the alliance hit another trip wire.

Ghosn was starting to deal with the mandatory retirement age of 65 at Renault. With the French government's assent, Renault's board of directors agreed to appoint him to another four-year term as CEO through 2022. But there was a catch. The appointment was reportedly contingent on cementing the alliance in a way that is "irreversible" after Ghosn finally fades from the scene.

Some analysts believe that agreement raised the possibility that Renault and Nissan would be steered to a full traditional merger.

Nissan's internal investigation of Ghosn's pay package may have slowed such a push.

"They were tired of the Ghosn regime," said one former Nissan executive familiar with the thinking, who didn't want to be identified. "The Japanese wanted to take the company back."

Last week, Saikawa appealed directly to Nissan employees in a companywide address. He rebuked Ghosn for amassing too much power in an "unequal" setup as the top man at all three carmakers, according to people who attended the town hall meeting.

"The overall tone is pretty harsh," said one engineer who watched Saikawa on video. "I'm not surprised at his tone and portrait of Ghosn as this dictator that's been leading Nissan astray. It's obvious from his message that he wants to rebalance the alliance structure."